SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA • (416) 607-3109 • john.chu@desjardins.com Amrit Sidhu, CPA, CA, Associate • (416) 607-3290 • amrit.sidhu@desjardins.com Surf’s up! Catching the next wave in cannabis—initiating coverage with a Buy rating and C$15 target The Desjardins Takeaway We are initiating coverage of High Tide with a Buy–Average Risk rating and C$15 target. High Tide is a leading cannabis retailer which ranks #2 among its peers in terms of store count and #1 in terms of EBITDA generated. It also operates in a low-risk, underserved segment of the cannabis sector and has the most diversified sales among its retail peers, generating meaningful revenue from its e-commerce platform as well as from the US, which suggests good optionality in that country going forward. Highlights A leading retailer. High Tide is Canada’s second largest cannabis retailer by store count and revenue. It generates the highest EBITDA (in absolute dollars and as a percentage of sales), which is driven by strong gross margins and low operating expenses. It is well- positioned in a market where the competitive landscape is fragmented. Most diversified retail platform. While the company generates the majority of its revenue from its brick-and-mortar stores, its e-commerce platforms generate close to 20% of its total sales. The majority of e-commerce revenue (mainly accessories and hemp-based CBD products) is derived from outside of Canada (mostly the US), which helps diversify its revenue base across products, platforms and geographies. Already EBITDA-positive. High Tide has been EBITDA-positive for the past five quarters (since 2Q FY20, ended April) and has generated the highest LTM EBITDA among its retail peers and the second highest LTM EBITDA in the entire Canadian cannabis sector. Low-risk, underserved market. We view retail as a lower-risk cannabis segment, but one which can still realize similar growth rates vs other segments. Retail generally requires substantially less capital, is less prone to writedowns and impairment charges, and has faced less sales volatility. While other segments have experienced overcapacity and excess supply, the Canadian retail market (more so Ontario and BC) remains underserved and has good runway to add more new stores. We believe large retailers are better positioned to take advantage of this opportunity than smaller players. Valuation Our C$15 target is based on an 18.0x EBITDA multiple for the period from 3Q FY22– 2Q FY23, which reflects the average multiple for a high-growth traditional CPG retailer group. Recommendation We are initiating coverage with a Buy–Average Risk rating. Rating Buy Risk Average 12-month target C$15.00 Symbol HITI, TSX-V/HITI, NASDAQ Sector Consumer Discretionary Closing price ($) C$9.25, US$7.29 Potential return (%) 62.2 52-week range ($) C$2.25–16.95 Avg daily value traded ($m) C$0.7 Shares O/S (m) 47.8 Market cap ($m FD) C$443 Net debt ($m) C$3 EV ($m) C$446 Year-end Oct-31 Desjardins estimates Annual 2021E 2022E 2023E Adj EBITDA (C$m) 21.5 46.3 51.8 Net sales (C$m) 177 312 365 Quarterly 1Q21 2Q21 3Q21E 4Q21E Adj EBITDA (C$m) 4.6 4.7 4.8 7.3 Net sales (C$m) 38.3 40.9 44.4 53.7 Thesis/key assumptions ● A retail leader in the underserviced Canadian cannabis market ● Offers the most diversified revenue base among its peers, which reduces volatility risk ● EBITDA-positive and a leader in LTM EBITDA generation ● Growth by opening new stores and through M&A Potential catalysts ● Higher ownership limits ● US federal legalization ● In-house/own-branded products ● Takeout and/or strategic partner ● Increased industry online sales Risks ● Increased competition from new store openings ● Operational risk from rapid expansion ● Integration risk from an active M&A pipeline ● Regulatory changes Source: Desjardins Capital Markets, Bloomberg, FactSet This report was prepared by an analyst(s) employed by Desjardins Capital Markets and who is (are) not registered as a research analyst(s) under FINRA rules. Please see disclosure section on pages 32–35 for company-specific disclosures, analyst certification and legal disclaimers. 1 Table of contents 3 Moving along the value chain to low-risk but high-growth retail 4 Canada, and Ontario in particular, needs more retail stores! 6 A closer look at the underserved Ontario market 7 Company profile 8 Operational footprint 9 E-commerce platforms 9 Strong management team and an experienced board of directors 9 A leading cannabis retailer in a competitive but fragmented market 12 Revenue diversification a key differentiator among retail peers and cannabis companies 14 A leader in EBITDA generation for the entire cannabis sector 15 An industry consolidator — focused on accretive acquisitions 17 Financial overview and outlook 20 Valuation 21 Catalysts and risks 23 ESG overview 25 Comparables table 26 Appendix 1: Management team and board of directors 27 Appendix 2: Financial statement projections 29 Appendix 3: A quick overview of the Canadian cannabis sector 30 Edibles to be a meaningful sales and margin catalyst for retailers 31 Overview of the retail landscape and its role in growing the cannabis industry SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA Amrit Sidhu, CPA, CA, Associate 2 Moving along the value chain to low - risk but high - growth retail While the cannabis sector remains in the relatively early stages of development, the cultivation sector has already experienced a shakeout where licensed producers (LPs) have scaled back capacity, incurred writedowns and divested assets, with a focus on cutting costs and accelerating the path to positive EBITDA. The extraction sector has already undergone a transformation whereby all of the major players have pivoted from being third-party providers of basic extraction/tolling services (due to weak demand) to manufacturing their own in-house brands and/or providing higher value-added white label/custom manufacturing services to customers. Retail is the final step in the value chain (Exhibit 1) and we believe it has fallen under the radar with investors — retail companies have similar growth outlooks as other cannabis sub-sectors but also feature lower capital requirements and lower overall risk. Ex hibit 1: Movin g alon g th e v al ue c hain to the lowest risk cannabis segment Source: Desjardins Capital Markets The low-risk retail sector. The retail segment does not have to deal with a high-fixed-cost business that requires a lot of capex — unlike LPs. There is lower risk of overcapacity and having to incur substantial writedown of assets as several LPs have done (we estimate close to C$5b of impairments have been recorded by LPs since 2019). Dilution of retail stores could eventually be a problem but the magnitude of writedowns would be much smaller and a lower risk at this point (we estimate the retail sector has recorded less than C$40m in impairments since 2019). LPs have had to deal with quality-control issues that led to biomass inventory being written down and/or entire crops being destroyed or thrown out; they have also had to deal with sales return provisions and/or price adjustments on poor-selling products. We saw massive overbuild in the sector (capacity, international operations, sales and marketing budgets, etc), which resulted in several organizational restructurings to help rein in costs. As a result, there have also been pivots in strategy: (1) LPs pivoting from focusing on the value segment to premium as consumer trends evolved; and (2) extractors pivoting from being third-party tolling/extraction services to manufacturing their own in-house brands and/or providing higher value-added white label/custom manufacturing services to customers. This has led to writedowns and disruptions to sales and margins. Retail has been able to avoid these issues; we therefore expect it to continue to have a lower risk profile going forward. High-growth opportunity. Despite the lower risk profile highlighted above, the retail sector is not sacrificing any of the inherent growth associated with the cannabis sector. Looking at consensus sales growth expectations for the Canadian retailers (~53% CAGR from 2020 – 22 on average for High Tide and Fire & Flower), it compares very favourably with the sales growth outlook for LP consensus (~53% CAGR) and custom manufacturers/extractors (~52% CAGR). We would also argue that the sales outlook for the retailers has better visibility given how underserved the Ontario market is in terms of retail stores. Furthermore, both major cannabis retailers (High Tide and Fire & Flower) have been EBITDA-positive for several quarters, and the EBITDA growth outlook for both is expected to be very robust (average CAGR of ~90% from 2020 – 22). Cultivation Crowded and fragmented space Capital - intensive Commodity exposure Regulatory limits Manufacturing Capital - intensive Brand - building required Consumer risk Packaging Low margins Scalability challenges Low barriers to entry Extraction Excess capacity but concentrated Limited commodity exposure Low barriers to entry High knowledge base Testing Good margins Scalability challenges Low barriers to entry Consumer risk Distribution High operating leverage Limited competition Freely scalable Large addressable market Less consumer and commodity risk Retail Underserved segment Fragmented Low capital required Lower barriers to entry Lower risk Regulatory limits SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA Amrit Sidhu, CPA, CA, Associate 3 Exhibit 2: Retailers forecast to have sales growth profile similar to those of other segments CAGR 2020 – 22 E (%) Based on calendar year Sales growth outlook EBITDA growth outlook Canadian retailers 1 53 89 Canadian LPs 2 53 NM Canadian manufacturers/extractors 3 52 52 1 Fire & Flower, High Tide; 2 Aurora, Canopy, Cronos, HEXO, IM Cannabis, Rubicon, Sundial, Tilray, TGOD, Village Farms; 3 Auxly, MediPharm, Neptune, Valens Source: Desjardins Capital Markets, FactSet, company reports Less sales volatility. LPs were also significantly impacted by provincial wholesalers rationalizing SKUs and destocking inventory levels such that sales were down 20 – 30% qoq during the early spring. Manufacturers saw flat to slightly lower sales and retailers saw modest sales growth during the same period, suggesting retailers experience less sales volatility. Overall, the retail sector has not had to deal with any of the above-noted issues, which makes it a much lower-risk sector but one that can still realize robust growth. The retail sector has also shown its resilience during the pandemic. Despite store restrictions ranging from outright closures to limited in-store capacity to curbside pickup only, along with provincial wholesaler destocking and SKU rationalization initiatives, retail has been the only sector that has not experienced significant sales pressures during this period. Canada, and Ontario in particular, needs more retail stores! While Canada as a whole was off to a slow start introducing new retail cannabis stores to the market, Ontario was particularly slow as it switched from a public model (to be operated by the provincial government) to a private one. Most of Canada (the provinces employing private-run retail models) has accelerated the rollout of new stores over the past year. We have looked at the established Colorado market as a benchmark for how the Canadian retail landscape could unfold in the coming years. We also highlight how many stores Canada and each province may be able to accommodate, using both Colorado ’s cannabis store and Canada’s liquor store models as benchmarks. In Exhibit 3 below, we show the current store count (row A) and what the optimal store count could be based on Colorado’s data (row D), how many more stores Canada would need to achieve this (row F) and the percentage increase from the current store count (row G). Overall, there remains a good runway of new store openings to come, which should bode well for the big cannabis retailers that have the financial wherewithal to add new stores. Exhibit 3: Potential store count for each province Canada BC AB SK MB ON QC NB NL NS PE Private or public retail model Private/ p ublic Private Private Private Private Public Public Private Public Public A Current store count 2,290 369 659 67 106 924 68 20 30 30 4 B 2020 stores 1,332 290 543 50 51 263 51 20 28 20 4 C Optimal store count based on: D Colorado data 3,728 503 436 116 136 1,449 845 77 52 97 16 E Alcohol sales 3,597 152 907 306 97 700 260 101 247 104 23 F Minimum number of stores to add (row D minus row A) 1,438 134 - 223 49 30 525 777 57 22 67 12 G % change (row F/row A) 63 36 - 34 74 29 57 1 , 143 287 74 222 288 Source: Desjardins Capital Markets, Statistics Canada, Colorado government SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA Amrit Sidhu, CPA, CA, Associate 4 Using Colorado as a benchmark implies the need for ~3,700 stores in Canada. Colorado legalized recreational cannabis in 2012, which makes it a good benchmark for identifying a variety of different metrics and trends. The state, which has a population of 5.7m people, recorded cannabis sales of US$1.7b (or ~C$2.1b) in 2020 based on ~598 recreational retail stores (Exhibit 4). This equates to Colorado having one retail store for every ~9,600 people (one for every ~10,000 in 2019) and ~US$2.9m (or ~C$3.6m) in annual sales per dispensary. Given Canada has a population of more than 6x Colorado ’s , that implies that more than 3,700 stores would be required — bearing in mind that Canada’s population is more spread out than Colorado’s, which may requi re more stores to properly serve the population. Based on Exhibit 3 (row A vs row D), Ontario needs significantly more stores, as do most other provinces with the exception of Alberta. We looked at the number of liquor outlets each province has (Exhibit 3, row E) and found that Colorado seemed to be a better gauge to determine the number of retail stores needed. For example, Ontario has just over 1,000 liquor outlets, by our estimates; it is already reaching that same level for cannabis stores and is expected to easily surpass it very shortly, with no signs of slowing down. We should also note that Ontario’s liquor outlets are mostly a government-run model (with the exception of grocery stores), making it harder to use it as a benchmark for the private-run cannabis retail store model. In Alberta, liquor stores are also based on a private model, suggesting it could see cannabis stores easily exceed the Colorado benchmark and move closer to the number of alcohol outlets in the province. Exhibit 4: Colorado recr eational cannabis sales analysis Year - end Dec - 31 (US$m) 2014 2015 2016 2017 2018 2019 2020 Recreational sales 303 578 862 1,091 1,214 1,410 1,747 Total # of licensed stores 322 424 459 509 549 572 598 Sales per store 0.94 1.36 1.88 2.14 2.21 2.46 2.92 Population serviced per store 1 16,614 12,853 11,982 11,002 10,364 10,052 9,648 Growth (yoy% ) Sales 90 49 27 11 16 24 Total recreational stores 32 8 11 8 4 5 Sales per store 45 38 14 3 11 19 1 Population divided by total number of licensed stores Source: Desjardins Capital Markets, US Census Bureau, Colorado government, Cova Revenue per store will likely decline as more stores are opened, but can it eventually reverse? We are mindful that as more stores open, revenue per store should continue to decline owing to dilution; however, the rate of decline — if any — depends on how quickly the black market converts to the legal market, as well as the additive nature of cannabis 2.0 (eg edibles, vapes, etc) to the overall basket size of an average sales transaction. The revenue per store for most provinces declined as more stores were added (Exhibit 5). Exhibit 5: Analysis of r evenue per store by province over time Store count Revenue per store (C$000) Province Jan - 19 Jul - 19 Jun - 20 May - 21 Jan - 19 Jul - 19 Jun - 20 May - 21 Alberta 65 200 486 638 216 107 96 94 BC 8 45 196 352 245 122 150 133 Québec 12 16 42 68 935 1,362 952 729 Ontario 0 23 94 776 NA 1,288 520 143 Source: Desjardins Capital Markets, Statistics Canada, various sources We find it interesting that revenue per store in Colorado has actually increased over the years (Exhibit 6), which may have been driven by the black market converting to the legal market, the introduction of edibles and medical patients switching to the recreational market as a cheaper source of products. This suggests that having a proper and extensive distribution network in place early on SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA Amrit Sidhu, CPA, CA, Associate 5 likely led to a thriving and growing sector which helped reduce the size of the black market. Depending on the rate of conversion from the black market to the legal market, as well as new users, average revenue per store in Canada could follow a similar trend as Colorado (ie increasing once the proper infrastructure is in place and conversion of black market users to the legal market accelerates). But for now, given Canada remains underserved, we expect revenue per store to continue to decline for the short to medium term as more stores are added. Exhibit 6: Colorado recreational revenue per dispensary trending higher Source: Desjardins Capital Markets, Colorado government A closer look at the underserved Ontario market Given Ontario is Canada’s largest province by population and also one of the most underserved cannabis markets from a retail store perspective, we wanted to pay particular attention to this market, especially as the province has been a focal point for many publicly listed retailers in terms of new store expansion opportunities. A recent explosion of new stores. While Ontario got off to a very slow start in terms of approving new retail stores, it started to accelerate its monthly approval rate from 20 per month in April 2020 to 40 per month in September 2020 and 80 per month in December 2020, and then to the current rate of 120 per month in February 2021. As a result, we have seen operational retail stores increase from ~150 in September 2020 to 263 in December 2020 and ~924 as of late July 2021. But the store count still falls below the ~1,400 stores needed to reach Colorado’s benchmark of one store per ~10,000 people. Ontario thus appears to remain underserved; that said, at the current approval rate of 120 new stores per month, the province should reach Colorado’s level by year -end 2021. Whether Ontario allows stores beyond that number remains to be seen. Store concentration an issue in some areas — expect a wave of closures. While the store count has remained below Colorado’s benchmark of one store per 10,000 people , there is still oversaturation in some key pockets, such as downtown Toronto (Exhibit 7), where in many instances there are multiple stores within the same block or in very close proximity to each other (Ontario did not implement any zoning restrictions in terms of minimum distance between stores, in contrast to Alberta). As a result, we expect a wave of store closures in downtown Toronto and other highly concentrated parts of Ontario and more stores opening in other pockets of Toronto and Ontario that can better serve consumers and expand the market opportunity. 0 100 200 300 400 500 600 700 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2014 2015 2016 2017 2018 2019 2020 (# stores) (US$m) Revenue per dispensary (LHS) Store count (RHS) SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA Amrit Sidhu, CPA, CA, Associate 6 Exhibit 7: Downtown Toronto oversaturated with cannabis stores ( both operational and pending) Source: AGCO Company profile High Tide, which was founded in 2009, is headquartered in Calgary and has 898 employees. The company began as a manufacturer/seller of its own-brand cannabis smoking accessories through its Smoker’s Corner– branded retailer/headshop, and since legalization in Canada has evolved to also include sales of recreational cannabis products. High Tide now has 93 cannabis retail stores nationwide under several different banners (as at August 31). It is expanding, with six additional retail stores coming online in Saskatchewan in the short term, and is targeting 200 retail stores across Canada in the long term. It is the second largest cannabis retail company by store count (Spiritleaf has more than 100 stores, mainly franchised and some corporate-owned). High Tide also operates a number of e-commerce platforms (Smoke Cartel, Grasscity, FABCBD, CBDcity, Canna Cabana, Daily High Club and DankStop) in Canada and the US. In addition, it earns subscription revenue from Cabanalytics, a consumer data insights provider. High Tide sells to the wholesale segment through its agreements with Valiant Distribution (accessories developer and distributor) and Famous Brandz (manufacturer of branded accessories). Two large Canadian LPs (Tilray and Aurora) have investments in High Tide (as of August 4, 2021, Aurora’s convertible debenture had an outstanding face value of C$10.4m and Tilray’s convertible notes receivable had an outstanding face value of C$2.0m). A large portion (~33) of High Tide’s retail stores were acquired with its Meta Growth acquisition (completed on November 19, 2020); see Exhibit 9 for retail stores by province. SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA Amrit Sidhu, CPA, CA, Associate 7 Exhibit 8: High Tide’s various brands and banners Brand/division Description Logos Retail Brick - and - mortar Canna Cabana Leading network of 93 recreational cannabis retail stores nationwide. Meta Growth NewLeaf Online Grasscity Four of the largest online stores for consumption accessories. Daily High Club provides a subscription box service. Smoke Cartel Daily High Club DankStop FABCBD FABCBD and CBDcity are leading online retailers of hemp - derived CBD products in the US. Note that FABCBD has its own brands but CBDcity is a reseller of other brands of CBD products. CBDcity Wholesale Valiant Distribution Global designer, manufacturer and distributor of proprietary designed and celebrity - licensed consumption accessories and lifestyle products. Famous Brandz Source: Desjardins Capital Markets, company reports Operational footprint High Tide’s 9 3 stores (86 corporate-owned, three branded (notably, all legacy lottery system winners), three joint ventures and one franchised) operate under the Canna Cabana, Meta Cannabis and NewLeaf brands (note that Meta and NewLeaf stores are expected to be rebranded as Canna Cabana stores by year-end). High Tide has the largest number of stores in Alberta and the second largest in Manitoba; it has the fourth largest number in Ontario and the third largest in Saskatchewan vs its examined peers in Exhibit 9. Notably, High Tide did not yet have operations in BC (the fifth largest province by absolute industry sales) as at August 31 but plans to enter the market soon (more on that later). Canna Cabana is High Tide’s main brand , with stores across Alberta, Saskatchewan and Ontario. As of 2Q21, High Tide’s loyalty program, Cabana Club, had 151,240 members ( vs 96,629 in 1Q21), with more than 50% of average daily transactions conducted by club members. The loyalty program includes a 5% discount on regular-priced purchases, exclusive discounts, private events, notifications on new strains/restocks and exclusive merchandise. Stores with the NewLeaf brand are located across Alberta and utilize the same Cabana Club loyalty program. Exhibit 9: Number of retail stores across provi nces by retailer as at August 9, 2021 BC AB SK MB ON QC YT NFLD Total Sundial (Spiritleaf) 6 52 2 4 39 0 0 0 103 High Tide (Canna Cabana, Meta, NewLeaf) 0 57 5 8 23 0 0 0 93 Fire & Flower (Friendly Stranger, Hotbox) 2 43 9 3 30 0 1 0 88 Canopy (Tokyo Smoke, Tweed) 0 10 6 12 41 0 0 6 75 Nova (Nova, Sweet Tree, Value Buds, YSS) 0 51 1 0 8 0 0 0 60 Source: Desjardins Capital Markets, company reports SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA Amrit Sidhu, CPA, CA, Associate 8 E-commerce platforms High Tide has a number of e-commerce platforms under various banners (see Exhibit 8 for retail/ e-commerce banners). Smoke Cartel, Daily High Club, DankStop and Grasscity are its e-commerce platforms for smoking accessories (ie pipes and bongs). Smoke Cartel has been operating for more than seven years and Grasscity has been operating for more than 20 years. High Tide’s acquisition of FABCBD marked its entry into the US hemp-based CBD e-commerce market, with CBDcity representing its second US CBD retailer banner. FABCBD has been operating since 2017 and offers its own FABCBD points reward program for loyal customers. CBDcity has been operating since May 2020. Both CBDcity and FABCBD sell a wide range of hemp-based CBD-dominant products (from oil and gummies to dog treats). Grasscity and CBDcity have more than 35,000 customer reviews, which in general bode well both for the credibility of the platform and as an aid in consumer decision-making. Canna Cabana also operates an e-commerce platform (in addition to its retail stores) for recreational cannabis and cannabis accessories sales. Strong management team and an experienced board of directors Senior management has strong experience in both the retail business and the cannabis sector. Specifically, CEO Raj Grover founded a chain of smoke accessories shops (headshops) in Alberta and leveraged that experience into High Tide. We believe Mr Grover’s experience dealing with cannabis consumers through his accessories stores gives High Tide an advantage in understanding the nuances of operating a cannabis retail store. Mr Grover was also able to leverage the smoking accessories business and his extensive relationships overseas (mostly in Asia) into the High Tide business model, such that higher-margin accessories represent a meaningful segment of its sales. The company’s COO, Aman Sood, also has extensive retail experience and recently served as director of operations at Meta Growth prior to its acquisition by High Tide in November 2020. During Mr Sood’s tenure at Meta, the company had the fourth largest network of stores in Canada and was one of the top revenue generators; its revenue per store was also among the highest in the cannabis retail sector, as were its gross margins. From an online platform perspective and an area of robust growth for High Tide, Chief Technology Officer Sean Geng managed Namaste Technologies’ cannabis e -commerce platform and founded Smoke Cartel, one of the world’s largest s moking accessories platforms. Lastly, its board of directors has a good mix of cannabis, retail, capital markets and financial services experience. See Appendix 1 for more details. A leading cannabis retailer in a competitive but fragmented market As of August 31, 2021, the company had 93 branded stores across Canada, of which 86 are corporately owned (sold three Kushbar stores on July 15). This makes High Tide the second largest retailer in Canada based on store count and in terms of revenue generated. However, Spiritleaf (recently acquired by LP Sundial) and its 103 stores (as of August 9) employ a franchise model, making its financials not directly comparable with those that employ a corporately owned model. Fire & Flower is just behind High Tide with 88 stores as of August 9. SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA Amrit Sidhu, CPA, CA, Associate 9 Exhibit 10: Cannabis retail landscape as at August 31, 2021 Source: Desjardins Capital Markets, company websites, company reports New store opening goals. The company is targeting 100 stores by year-end 2021 (we are forecasting 96), with a medium-term target of 200 stores (we are forecasting 164 by the end of FY23 and believe Ontario and BC would need to lift their maximum store limits in order for High Tide to reach this goal). In the near term, the majority of the new store growth is expected to be in Ontario, where High Tide has 20 corporately owned stores — we expect this number to reach 30 by the end of October 2021, in line with management’s expectations. As Ontario increases the maximum number of stores an entity can own to 75 stores (from 30 currently) starting in October 2021, we expect High Tide to add ~10 stores per quarter (at an average capex of ~C$0.35m, which also includes starting inventory) and reach the 75-store limit by early 2023 (this timeline could be accelerated through M&A); this is in line with management’s goal of reaching 75 total stores in Ontario over the next 12– 18 months. High Tide expects to enter the BC market soon using a greenfield and M&A approach to reach its maximum eight-store limit, which we forecast to take place by the end of FY22; it is close to opening stores in BC but may look to acquire three or four stores given the 6 – 9-month ramp-up needed to open a new store (which includes the time to get approval for a licence). Saskatchewan is also an area which will see new stores added following High Tide’s acquisition of six retail locations in July 2021 (one operational store and five in various stages of construction) and could be an area of store growth beyond the five under construction given how difficult it is to obtain a retail licence. Saskatchewan remains well off the one store per 10,000 people mark — it has one store per ~17,500 people, making it one of the most underserved provinces that employs a private retail model (Québec and other provinces are more underserved but employ a government-run retail model). High Tide will likely continue adding stores in Alberta but at a much slower rate and in strategic locations where there is ideally less competition. For context as to the rate of new stores it could open, High Tide has added 14 new stores across Canada since the beginning of April, in addition to one operational store it acquired, which equates to an average of three stores per month. With the pandemic-related restrictions loosening, High Tide should accelerate its new store openings in the coming quarters. 0 20 40 60 80 100 120 Sundial High Tide Fire and Flower Canopy Growth Nova Plantlife (# stores) Alberta Ontario BC Manitoba Saskatchewan Newfoundland SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA Amrit Sidhu, CPA, CA, Associate 10 Exhibit 11: High Tide’s e xpandin g ret ail store footprint Source: Desjardins Capital Markets, company reports Exhibit 12: Desjardins ’ n ew store fo r ecast for High T i de (corporately owned) Source: Desjardins Capital Markets, company reports New store location strategy should help limit competition and margin pressures. Given a lack of zoning restrictions in Ontario to prevent competing stores from establishing operations nearby, High Tide has been focused on securing store locations within a plaza/strip mall or power centre where there is an anchor tenant (eg a major grocery store chain, an LCBO, Walmart, Shoppers Drug Mart, Canadian Tire, etc), which should help reduce competition and the oversaturation that we have seen in downtown Toronto and elsewhere. Usually, the leases at malls and plazas indicate that there will be no other cannabis stores allowed on the premises; we suspect that landlords are more likely to sign agreements with more established retail brands and those that are more financially secure, such as publicly listed retailers like High Tide. This should therefore limit competition and help reduce the likelihood of price wars between nearby stores that are trying to draw customers. 0 10 20 30 40 50 60 70 80 90 100 Jan-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 (# stores) Alberta Ontario BC Manitoba Saskatchewan 0 25 50 75 100 125 150 175 1Q21 2Q21 3Q21E 4Q21E 1Q22E 2Q22E 3Q22E 4Q22E 1Q23E 2Q23E 3Q23E 4Q23E (# stores) Alberta Ontario BC Manitoba Saskatchewan 66 89 89 84 84 80 64 77 112 84 96 164 163 161 154 140 126 164 SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA Amrit Sidhu, CPA, CA, Associate 11 Revenue diversification a key differentiator among retail peers and cannabis companies High Tide has the most diversified revenue of the publicly listed retailers as well as one of the most diversified revenue bases in the entire Canadian cannabis sector. A good portion of its revenue comes from non-cannabis but complementary-to-cannabis products, which also represent the majority of its international and online revenue. Looking ahead, we forecast international sales will represent a growing percentage of total sales (to 27% by FY23 from ~18% in FY21), which should help further diversify its revenue, lower its risk profile and provide greater access to a potentially fast-growing market. Online platforms represent the majority of High Tide’s international sales and should be key growth drivers. Following its acquisition of Grasscity (closed December 2018), Smoke Cartel (March 2021), FABCBD (May 2021), Daily High Club (July 2021) and DankStop (August 2021), we estimate High Tide’s online sales would represent ~27% of total sales by FY23 from ~18% in FY21. Management estimates these platforms have a revenue run rate of C$55m in US-derived sales going forward, and presumably the platforms should see continued strong growth above this level. These platforms have already experienced strong sales growth, which they have continued since being acquired. For example, we believe Smoke Cartel’s sales have already doubled the 2020 run rate; sales of FABCBD doubled in 2019 and again in 2020 (management does not expect it to double again in 2021, but is still expecting robus t growth) and Daily High Club’s subscriber base is expected to grow 4 – 5% per month in the short to medium term (equates to ~50% growth on an annualized basis), which we believe may translate into a similar sales growth rate. COVID-19 has accelerated online sales by as much as 10 years. There is a common view that the pandemic changed the face of retailing, likely forever. It has accelerated the adoption and growth of e-commerce by 4 – 6 years according to Adobe and by as much as 10 years according to McKinsey. Millions of households have been buying groceries and other consumer goods for pickup or home delivery and a good portion are expected to continue using e-commerce long after the pandemic is over. McKinsey estimated that US e-commerce penetration increased to more than 30% during the height of the pandemic in 2020 from mid-teens prior to the pandemic. Not only did online shopping increase in regions where e-commerce was already widely accepted, but it also took place in regions where online shopping had l ow penetration rates. This should bode well for High Tide’s online platforms. US sales data also showed which consumer good categories were viewed as essential during the pandemic. Not surprisingly, groceries, alcohol and pharmacy stood out and saw strong year-over-year growth (Exhibit 13). We would put cannabis in this category as well, which should reinforce the sector’s ability to generate sales during challenging economic periods. SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA Amrit Sidhu, CPA, CA, Associate 12 Exhibit 13: Sal es changes by category during the pandemic (estimated for 2020) Source: IBM High Tide is best positioned to benefit from an accelerated e-commerce movement. Given the limited e-commerce opportunities in the Canadian cannabis landscape (most provinces run their own competing online platform), most companies are generating minimal revenue from this line of business. For example, in Ontario the government runs the OCS.ca online platform; the pandemic has increased online sales such that the platform represented ~15% of total cannabis sales in Ontario from a historical average of ~10%. During the pandemic, private retailers have had the opportunity to make use of online deliveries and curbside pickup, but the OCS remains a meaningful online presence (and competitor) to private retailers in Ontario. There could be an opportunity going forward where Ontario allows consumers to purchase more regularly online directly from retailers instead of through the OCS.ca platform. Alberta is also considering allowing private-sector online cannabis sales, which, if approved, would provide retailers with another avenue for revenue at similar to slightly lower margins. We believe High Tide would be one of the best positioned of the private retailers if the private sector is allowed to have online sales permanently as it already has existing online platforms it can leverage to build an efficient platform with better economies of scale; it also has one of the highest store counts, which should allow for more efficient logistics (ie faster delivery and at a lower cost) than what most of its retail peers can offer. The US represents the majority of High Tide’s international sales and pr ovides US optionality. F ollowing President Biden’s victory in November 2020 and the Senate flipping from Republican-led to Democrat-led in January 2021, the cannabis sector has seen an increase in Canadian companies expanding into the US (mostly through tuck-in acquisitions). These initiatives generally involved hemp-based CBD-related products as cannabis is still federally illegal in the US. However, these moves were generally made with the idea of building a brand, gathering market intelligence and establishing a distribution network that can eventually be leveraged once cannabis becomes federally legal; this would help facilitate a smoother transition to cannabis by leveraging an existing hemp- based CBD business that is complementary to cannabis. High Tide was one of the first to implement such an initiative with its Grasscity acquisition, which sold smoking accessories mainly to customers in the US; these accessories are generally for use with cannabis products. We believe this gives High -75% -50% -25% 0% 25% Men's Department store format Footwear Women's Children's Jewelry Consumer electronics Other clothing Consumer electronics and appliances Beauty/Sephora Total clothing Home Eating places Office supplies Toys Health and personal care Retail sales Consumer appliances Sports/hobbies Pharmacy Grocery stores Building materials Beer, wine and liquor Electronic shopping format Sales change (yoy%) SEPTEMBER 2, 2021 High Tide Inc. John Chu, CFA Amrit Sidhu, CPA, CA, Associate 13 Tide a connection with US cannabis users (as well as internationally) given the complementary nature of the smoking accessories to cannabis products. High Tide recently established a warehouse base in Las Vegas to act as the main distribution hub for Grasscity, which also gives High Tide the foundation for a distribution network. High Tide could eventually follow the same route as Canopy and retail peer Fire & Flower, engaging in a partnership that would eventually give it a purchase option to acquire the US-based partner once cannabis is federally legal (but no revenue is being recognized in the meantime). That said, High Tide noted that it already has a meaningful presence in the US through its online platforms (generating close to 20% of revenue) as well as its Las Vegas distribution warehouse. A leader in EBITDA generation for the entire cannabis sector Not only is High Tide generating the highest EBITDA among its retail peers, but it is also generating the second highest EBITDA of the entire Canadian cannabis sector (Exhibit 14). It has been generating positive EBITDA for the past five quarters (commencing in 2Q FY20 (ended April)) and has seen quarter-over-quarter growth — it is the only Canadian cannabis company we are aware of that has been able to do this for that long. Exhibit 14: EBITDA rankings Note: Aurora, Cronos and Canopy have LTM EBITDA losses that exceed C$100m and have been excluded from this chart Source: Desjardins Capital Markets, FactSet, company reports A leader in margins and cost control. High Tide has consistently been among the leaders in gross margin among its retail peers. It also has one of the lowest operating cost environments (based on SG&A as a percentage of sales and SG&A o